Short term mortgage fix still an appealing decision

Fixing mortgages for six months is still an attractive option compared to floating rates for borrowers, ANZ says in its latest Property Focus.

The bank says borrowers might want to consider fixing for one more six-month term before looking at longer-term rates.

One bank is already offering a three-year rate at 4.95% and independent economist Tony Alexander says that would be good enough if he was borrowing.

ANZ chief economist Sharon Zollner says while the RBNZ has implied more OCR cuts to come, there is debate about how quickly and how much.

She says irrespective of how long it takes, the bank and RBNZ agree the low point in the interest rate cycle is near and as a result many borrowers will want to lock in for a longer-term.

For its part, the RBNZ expects the OCR to bottom out at 2.85% in the first quarter of next year. On the other hand, the ANZ is forecasting it to fall to 2.50% in October, and for wholesale rates to bottom out around the same time, give or take a few months.

Alexander says given the underlying inflationary pressures still in the economy an OCR cut to 3% is likely but below that is not guaranteed.

“There is massive uncertainty about how growth and inflation overseas and offshore will track in response to the United States’s trade war and that means caution from the central bank.

“Under the previous RBNZ regime that caution would have been a bias towards the downside for the cash rate, but under current leadership that caution is likely to manifest itself in a more professional manner with less whipping around of the cash rate.”

Could fixed rates drop below the existing low of 4.95%? Alexander says “maybe”.

"Forward looking indicators continue to point to the housing market staying fairly steady, with rising demand being largely matched by supply,"

“Competition between banks in the form of rate discounting has so far been mild this cycle and I’d expect any reductions below 4.95% to be minor.

He expects most homeowners to fix for one or two years because the time horizons of borrowers here are “very, very short”.

ANZ’s projections have one-, two- and three-year mortgage rates falling by only another 10-20 basis points or so.

“Many borrowers may feel that it will be less of a punt and less stressful to just fix for one or two-years at 4.99% rather than try to pick the absolute bottom.”

Zollner says these rates are the lowest in the market and are not too far off where the bank sees mortgage rates bottoming out even if the OCR keeps falling.

“For many borrowers, the choice will come down to how convinced they are that interest rates will keep falling, and how much more they stand to gain if they do.”

On the housing front, ANZ says the market is slowly lifting, but it’s certainly not going anywhere fast.

"Forward looking indicators continue to point to the housing market staying fairly steady, with rising demand being largely matched by supply," Zollner says.

Sales volumes have lifted about 40% from their cycle low around the start of 2023 and are now back to around their long-run average.

Rising sales volumes are often followed by an acceleration in price growth, but for now, price tension from rising demand is being tempered by ample supply, she says.

Plenty of sellers have brought their properties to the market over the past few months, and inventories of property for sale are sitting around decade highs.

While inventories did tick down fractionally in April as the flow of new listings eased back, Zollner says  it’s too soon to say whether this is a change in direction or just noise.